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GGD-94-25R 1 (1993-11-10)

handle is hein.gao/gaobacklq0001 and id is 1 raw text is: ISO 26 Untited States GAO General Accounting Office Washington, D.C. 20548 General Government Division B-255468 November 10, 1993 The Honorable Robert L. Livingston House of Representatives Dear Mr. Livingston: In an August 5, 1993 letter, you asked us to provide information on five issues related to farm loan programs. Other GAO groups are responding to the first four issues. We are responding to the fifth, which deals with our work on loans that have been forgiven by the Farmers Home Administration (FmHA) and other government agencies. You asked us to determine (1) the tax implications of debt forgiveness; (2) whether forgiven debts are taxable; and (3) if such debts are not taxable, what the implications of taxing them would be. In February 1993, we issued a report on debts forgiven by the Federal Deposit Insurance Corporation (FDIC) and Resolution Trust Corporation (RTC).' A copy is attached for your information. We believe it answers your questions to a large extent, if not completely. Section 61 of the Internal Revenue Code (IRC) requires taxpayers to report their forgiven debts as income. Certain exceptions exist under IRC Section 108 and are described in detail for farmers in IRS Publication 225, Farmer's Tax Guide. Taxpayers who take advantage of the exceptions to declaring forgiven debts as income are required to reduce tax benefits, such as a deduction for net operating losses or the cost basis for a property, generally by the excluded amount. Under these exceptions, forgiven debts are not considered taxable income if (1) the debt is forgiven in a case under federal bankruptcy proceedings, (2) the debtor is insolvent and the amount of debt forgiven does 'Tax Administration: Information Returns Can Improve Reporting of Forgiven Debts (GAO/GGD-93-42, Feb. 17, 1993). GAO/GGD-94-25R, FmHA Forgiven Debts

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